The Real Job Killer

Michael Brush, contributor to MSN Money, says the decline in stock listings and especially IPOs has cut off a huge source of employment growth in the US.

While economists debate whether we're headed for another Great Depression, we're already in one of another sort: a great depression in the number of stocks available on US stock exchanges.

The number of stocks trading on US exchanges has declined a troubling 39% over the past 15 years, while the numbers continue to rocket higher virtually everywhere else in the world.

Experts blame the revolution in the US stock market since the mid-1990s. That has changed the game for the pros and brought in throngs of small investors. But it's also made the US market a tougher place for young, creative companies that need capital to grow.

This market revolution allowed many more everyday investors to dive into stocks, [but] it also opened the way for computerized high-frequency trading of millions of shares, because trading costs are now so low. All this made the stock market a far more hostile place for small companies, because the vast scale of rapid-fire, index-based trading favors big companies.

The result is that decidedly fewer small companies are joining the market each year through initial public offerings, or IPOs. This means fewer companies can raise capital to invest and grow, and we're losing the jobs and growth they might have created.

Particularly troubling is the decline in very small IPOs raising just $5 million to $10 million in capital—deals that used to be routine.

Fewer companies going public hurts us all, because small companies can simply grow faster than huge companies.

Of course, many entrepreneurs who might have gone public still go into business and raise capital in other ways. But those businesses might have grown a lot more had they been able to go public and used the stock market machine to raise cash.

Before the mid-1990s, brokerages might have charged a $60 commission for a trade, and they quoted stocks with 25-cent spreads between the bid and the ask—the price you sold a stock for and the price you bought it for. (The brokerages pocketed the difference.)

[Those profits funded] an ecosystem that supported small companies: analyst research on small-cap companies, sales teams to work the phones and sell a company's story, and trading desks with enough capital to smooth out price moves in small-cap stocks.

All that's gone now. Small-cap research is scarce, so it's hard for investors to understand these businesses. The stocks can also swing wildly, because there are no trading desks committed to helping them grow.

There may be a fix: a new stock market that would cater to small companies and bring back the old ecosystem that used to support them.

To bring back that system, regulators such as the Securities and Exchange Commission would have to exempt a new exchange from the rules that killed the old system. But this is doable.